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The Trillion Dollar Coin

by | 8th, July 2011

SO this is how we should solve those pesky government debt problems: the trillion $ coin.

No, Tsy isn’t authorized to just “print” money, the Federal Reserve Act gives that power to the Fed, However, the Coinage Act grants the Secretary of the Treasury rather broad coin seigniorage authority. Geithner could sidestep the debt ceiling this afternoon by ordering the West Point Mint to coin a 1 oz. $ 1 trillion coin. Tsy can then present the jumbo coins at the NY Fed to buy back $1 trillion in Fed-held debt (the Fed has to accept it, a creditor can’t refuse legal tender paid in to settle a debt).

Well, that’s simple for the septics then, just make up a coin, hand it over and the debt disappears.

So, err, why can’t we do that? And if we did, wouldn’t it just be lovely?

Actually, we can do that. Without even having to make the coin in fact. And it would be very simple to do as well as a result of this QE, this quantitative easing that’s been going on.

The way that this QE works is that, in between the Treasury and the Bank of England, they invent lots more money which they then use to go and buy the Treasury bills, the ones that the government is issuing to pay for the budget deficit. Seems a bit strange, I know, but the aim is to lower long term interest rates: if we just tried to sell all the gilts into the market then interest rates would rise. Not what we want in a recession. So, print money, buy the bonds and interest rates stay low (ish).

As a result, the government owns lots of these bonds which say that the government owes lots of money to people. We could just cancel the bonds and thus there’s a lower national debt. So we can do what the septics are urged to do with the trillion $ coin. Easily.

There is, however, a problem. This will set off inflation. Which is why we’re doing this weird thing of printing the money to buy bonds in the first place: it would obviously be easier to just print money for the government to spend without issuing the bonds at all. But that would be a straight increase in the money supply and thus be inflationary.

As would cancelling the bonds be inflationary. As would using the trillion $ coin be inflationary. Which, actually, is why we don’t do it.



Posted: 8th, July 2011 | In: Money Comments (2) | Follow the Comments on our RSS feed: RSS 2.0 | TrackBack | Permalink